Field of the Invention
The present invention relates to a system and method for evaluating sequential decision problems that have multidimensional states, the evaluation providing a solution to maximize the value, as defined by the value functional equation, received by the user. In particular, the present invention relates to a system and method for solving sequential decision problems that have multidimensional states, where these states represent different sets of conditions that affect the decision problem.
Background
Decision makers including investors, business managers, public officials, entrepreneurs and private individuals regularly make decisions that require the decision maker to attempt to account for future events. The decision maker will take actions, such as choosing where to invest money, what policy to use, what product to market or what kind of investment to make based upon their prediction of future events. In the past, decision makers selected a course of actions based upon their experience and primitive heuristic rules-of-thumb, however decision makers continued to desire better tools.
With the development of computer hardware, software and the Internet, new tools were developed to enable decision makers to evaluate different possible courses. However, these tools fail when faced with multi-period decision problems having asymmetric risks and real options. In a multi-period problem the decision maker may take actions at many future points in time. In a problem with asymmetric risk the likelihoods of future events are not drawn from a symmetric distribution. For example, the upside risk may be greater than the downside risk, or vice versa. In a problem with real options the decision maker is given a chance to change the selected action at future points in time based upon the information gained from prior choices, learning as the problem evolves.
This failure is well known to decision makers, and various unsatisfactory tools have been developed. However, currently there is no known technique to handle multidimensional states representing different conditions while allowing for asymmetric risk and real options, as is often required by the real world.